The Stabilizing Effect of Hydro Reservoir Levels on Intraday Power Prices Under Wind Forecast Errors

Abstract

The power system has to deal with three main sources of uncertainty: demand uncertainty and load prediction errors, failure of power plants and uncertainty of wind. The growing share of wind and other intermittent generation sources in the European supply increases the uncertainty about power production in day-ahead and longer-term predictions. As EU member states increase the deployment of wind power and other intermittent renewable energy sources, the intraday and balancing market will gain more interest, as additional demand for reserve and response operations is needed. Hence, it becomes relevant to analyse the effect of wind power forecasting errors on intraday power prices. A higher forecast error will increase the need of intraday markets to balance out the oversupply or deficit of wind power on an hourly basis. This oversupply or deficit can be corrected though flexible hydropower plants; however the power price is highly influenced by the fluctuations in the reservoir level (Huisman et. al [2013]). In this paper, we question to what extent hydropower a stabilizing effect has on the impact of wind forecast errors on NordPool intraday prices. To do so, we examine the peak and off peak imbalance power prices for the Scandinavian market (ELBAS) from 2011 until 2013 with a Markov regime-switching model in periods with low and high hydro reservoir levels. Results indicate that under wind forecast error, the use of hydropower capacity in intraday markets is proven to be an effective volatility control mechanism. However, the price stabilizing effect of hydropower capacity does not take place at all times.

Keywords: Electricity, intraday prices, wind forecast error, Markov-switching models

JEL Classification: L11, Q41, C24